Menu

Insurance and subrogation

I recently negotiated a contract for the storage and maintenance of high value critical equipment. In the context of insurance solutions we discussed the issue of joint names insurance; whether it was necessary or desirable in the context of our project, whether a waiver of subrogation was required under the contract and how this might affect the behaviour of the party who would benefit from not being subject to a subrogated claim.

In my experience, the issue of joint names insurance and subrogation can be tricky and often causes problems when negotiating commercial contracts, so I was relieved to see that the Court of Appeal holds the same view.

Gard Marine

In Gard Marine & Energy Ltd v China National Chartering Co Ltd (Rev 1), one of the issues was whether the insurance arrangements agreed by the parties affected their liability under the terms of the underlying contract. In this case, despite the relevant insurance policy being in the joint names of the demise charterer and the ship owner “as their interests may appear”, one of the insurers, Gard Marine, sought to exercise its right of subrogation against the demise charterer for losses arising from the charterer’s alleged breach of contract.

The demise charterparty contained optional provisions for insurance. In brief, one option provided for the demise charterer to effect the joint names insurance, the other option provided for the owner to effect the joint names insurance. However only one of these options contained an express waiver of subrogation. The joint names option chosen by the parties did not expressly state that rights of subrogation would be waived. Despite this, the Court of Appeal considered that this provision contained the complete code for the treatment of insured losses and that the parties could not have intended that the demise charterers would be liable to the owners in respect of losses covered by the relevant insurance policy.

The court commented that:

“…it is vital to construe the underlying contract between the parties in order to see if there is truly an intention that the insurance is for the joint benefit of the parties. But if there is an agreement that the insurance is to be ‘in joint names as their interest may appear’ the agreement is likely to be construed as being an agreement to insure for the parties’ joint benefit. This will normally mean that the parties have agreed on an insurance solution without any rights of subrogation.”

“… it would be nonsensical if those parties who were jointly insured under the CAR policy could make claims against one another in respect of damage to the contract works. Such a result could not possibly have been intended by those parties. I have little doubt that they would have said so to the officious by-stander. If, therefore, I were wrong on the co-insurance point, I would have held that there was an implied term…”

Perhaps a more surprising aspect of the Gard Marine case is the court’s comment on Rix LJ’s (obiter) suggestion in Tyco Fire & Integrated Solutions (UK) Ltd v Rolls Royce Motor Cars Ltd that clear words are needed to exclude liability for negligence and a provision for insurance in joint names, without more, may not be sufficiently clear for that purpose because:

“…an implied term cannot withstand express language to the contrary. Moreover, if the underlying contract envisages that one co-assured may be liable to another for negligence even within the sphere of the cover provided by the policy… there is nothing in the doctrine of subrogation to prevent the insurer suing in the name of the employer to recover the insurance proceeds which the insurer has paid in the absence of any express ouster of the right of subrogation…”

While not disagreeing with Rix LJ about the need carefully to construe the underlying contract between the parties, the court said that the prima facie position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other. That will be all the more so if it is agreed that the insurance is to be in joint names for the parties’ joint interest or if there are other relevant circumstances. The court went on to say that one of the main reasons why parties take out insurance is that they need to be covered for the consequences of their own negligence. In other words, even where there is no provision for joint names insurance there will be no rights of subrogation if it is clear that the insurance was intended to be for the joint benefit of the parties.

Practical implications

It seems to me that this decision introduces an element of uncertainty as to whether this approach will apply to limit express indemnities given by one party under the contract for specified losses (as in the Tyco case). I think probably not, but every case will turn on its own facts. As always, best practice is to spell out in clear terms how the insurance arrangements affect the parties’ liabilities. The courts are not seeking to dissuade parties from contracting on the basis that, within a specified sphere of risks, matters are to be settled between them on the basis of an insurance-funded solution. Quite the opposite.

The Gard Marine case certainly doesn’t prevent parties using other strategies to allocate risks that may or may not be backed by insurance, such as express liability in the case of negligence (up to a cap perhaps commensurate with the level of any excess), carve outs for wilful misconduct (or other uninsurable actions) or service credits for performance failures. What is clear is that the courts will look at the underlying contract to see if the insurance is really for the joint benefit of the parties.

In my client’s contract, we included a waiver of subrogation even though a joint names policy was not ultimately required. This in itself raised its own issues in relation to incentivising the maintenance contractor to properly store and maintain critical emergency response equipment in a “ready-to-go” state while simultaneously ensuring that the all-risks material damage policy (with a waiver of subrogation) responded in the appropriate way. That is a blog for another day.